Tuesday, October 14, 2008

Dimon, Munger, Rohatyn: No More Vegas

From Forbes:

..."The big proprietary desks with huge leveraged positions will be diminished," says Dimon. "Some hedge funds will find it harder to make the same level of profits," he adds....

Even more radical is Berkshire Hathaway's (nyse: BRK - news - people ) vice chairman. Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you're dealing with the safest securities around."

That 50% margin level, incidentally, is the maximum that ordinary investors can obtain from their broker when they purchase common stock. Before their respective demises, Bear Stearns and Lehman Brothers were leveraged to the tune of $30 of debt for every $1 of capital.

To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that's true to his spirit. He's also furious with the accountants, in particular for letting Wachovia (nyse: WB - news - people ) report actual profits on accrued interest from risky mortgages when, in fact, the interest wasn't paid but added to the principal amount due on the mortgages....MORE